By Nick Cunningham, Oilprice.com:
Natural gas consumption in the United States could soar by 19% to 31% over the next five years due to a wave of industrial projects slated for construction.
A new study from the University of Texas’ Center for Energy Economics found 144 natural gas-intensive industrial projects on the drawing board that could be built by the end of the decade. They include processing facilities for the production of ethylene, methanol, ammonia, urea, nitrogen fertilizer, and gas-to-liquids, among others.
Taken together, the projects could total $121 billion in investment and add 26 billion cubic feet per day of natural gas demand. The Texas projections are significantly higher than what the U.S. Energy Information Administration has predicted.
The sudden surge of major projects being drawn up in corporate board rooms is a direct result of the shale gas revolution, which brought enormous volumes of natural gas online and caused prices to crater. Flush with cheap gas, major plastics and fertilizer companies are rushing to build new facilities that use natural gas as a feedstock for their products.
Many of the facilities – such as ExxonMobil’s ethane cracker in Houston, and BASF’s ammonia plant in Freeport, Texas – will be constructed near the Gulf Coast, to take advantage of cheap gas and existing industrial infrastructure.
The flurry of construction underway is essentially a massive bet on natural gas prices staying low. For the last few years, low natural gas prices have attracted many companies to “reshore” their operations as lower energy costs offset higher labor costs. The natural gas industry has trumpeted the shale revolution, and has claimed that the “reindustrialization” of America will be a permanent fixture in this new era of energy abundance.
And that may be true. Relative to other industrialized countries, natural gas is extraordinarily cheap. As of July 2014, natural gas prices are at a six month low, falling to $4.22 per million Btu (MMBtu), because of moderate summer weather.
More importantly, natural gas futures remain steady. Contracts as far out as 2017 are priced below $5/MMBtu, an indication that the shale revolution will continue to churn out record levels of natural gas even as the country consumes more of it.
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But the big question is whether or not prices can remain as stable as people think. Natural gas prices are historically volatile – Henry Hub prices have more than doubled since 2012 alone.
And they are infamously sensitive to weather patterns. Earlier this year, a harsh winter in the eastern U.S. caused natural gas prices to spike. The higher prices even breathed new life into the coal industry, as the rapid switch from coal to natural gas took a temporary pause.
As natural gas storage was drawn down during the brutally cold winter, fears arose that the period of cheap natural gas was over. At a minimum, the era of sub-$2/MMBtu natural gas is long gone.
More to the point, “reindustrialization” itself could contribute to higher prices. The 19 to 31 percent increase in natural gas demand as a result of the number of industrial plants to be constructed could significantly affect prices. Ironically enough, the ethane crackers and fertilizer plants to be built to take advantage of cheap natural gas may themselves send prices much higher.
That also does not take into account the build out of natural gas-fired power plants for electricity generation, or a hypothetical expansion of natural gas vehicles. Unless drillers can somehow keep up by dramatically increasing production, it is unclear how all supplies will be able to meet all the new demand.
If prices rise much more than anticipated, many of the planned industrial projects could be unprofitable. To be sure, that is how supply and demand produce equilibrium: through the price mechanism. But that also means that the price that the market settles on will likely be higher than what it is today. By Nick Cunningham, Oilprice.com.
Natural gas and crude oil historically traded roughly in parallel, based on their energy content. But that relationship fell apart during the natural gas drilling boom that ended in a glut that crashed the price. Now the price has more than doubled, but it’s still far too cheap compared to oil. Read…. The Natural Gas Debacle